The Greek philosopher Heraclitus was right - “Change is the only constant.”
Your life is and will be subjected to multiple changes across the years. However, there is one constant concern - a concern for the financial safety of your family when you are no longer around.
What follows is an increased purchase of various types of life insurance policies. How do you decide which type of life insurance plan suits you best?
Let’s compare 2 such variants, term insurance plans (a vanilla financial protection tool) and Endowment plans, and find out which of the two plans is a better product.
Term Insurance vs Endowment Plans
| Features | Term Insurance Plans | Endowment Plans |
|---|---|---|
| Definition | A vanilla financial tool that extends funds after the death or total and permanent disability of the policyholder. | A term plan with a savings component extends financial security and helps your finances grow over the years. It also includes a death component. |
| Flexibility | ❎ | ✔ |
| Investment Option | ❎ | ✔ |
| Cash Value | ❎ | ✔ |
| Premiums | ↓ Pocket-friendly premiums |
↑ Relatively higher premiums than term insurance plans. |
Heads Up: It takes an average person up to 5 hours to read & analyze a term life policy and 10 hours or more to compare different plans and make a decision.
This is why we propose a better alternative - taking a 30-minute FREE consultation with Ditto’s certified advisors. We have a spam-free guarantee, and we’ll never push you to buy a plan. Don’t delay this - we have limited slots every day, book a quick call here before they run out.
Understanding Term Insurance and Endowment Plans
- What are Term Insurance Plans?
Term insurance policies are financial protection tools that extend their coverage to your beneficiaries in the event of your death. These plans come with a tenure of your choosing and are one of the market's most affordable life insurance covers, offering substantial coverage.
This cover is meant to act as a financial replacement for you when you are not around. The sum can be used to meet various financial goals, requirements, and liabilities.
2. What are Endowment Plans?
Endowment plans are a type of life insurance policy that combines dual benefits - financial protection via its insurance component and investment channel via its savings component.
- Insurance Component - The insurance aspect of Endowment plans kicks in if a policyholder passes away during the policy's tenure. In this case, the nominee receives the sum assured and any additional benefits from the added riders in the form of death benefits.
- Savings Component - The savings aspect of endowment policies enables you to save regularly throughout the plan. If you survive the plan's tenure, you receive this sum as a lump sum.
What are the Pros of Term Insurance Policies vs Pros of Endowment Plans?
| Pros of Term Insurance Policies | Pros of Endowment Plans |
|---|---|
Endowment policies offer a life insurance protection aspect similar to that of term insurance policies. You choose the coverage amount and the tenure; upon your death during the plan's tenure, your beneficiaries receive the death benefits (sum assured + rider provisions). |
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Under Section 80C: On the premiums paid towards term insurance policies, you enjoy tax exemptions up to ₹1.5 lakhs. Under Section 10(10D): You get complete tax exemptions on the death benefit received by the beneficiaries and the maturity benefits accepted by policyholders. In this case, there is no upper limit on the tax benefit offered. Under Section 80D: On the critical illness rider’s premium, you can get tax exemptions. This tax benefit is subject to changes based on the policyholder’s age and varies from ₹25k to ₹1 lakh. |
Endowment plans offer a savings perk along with life insurance. As per this, you can save considerably over the tenure of your plan. So, you pay a common premium towards the savings and insurance requirements, and if you survive the tenure of the policy, you are offered the saved amount as a maturity benefit. |
Single payment: This is best suited for policyholders with no financial restraints. He/She can pay up the entire premium in one go, upfront. While this mode of premium payment can earn the policyholder some discount, it also refrains one from tapping into the perks of customising the plan with value-adding riders. Regular payment: This mode of premium payment is spread thin across the entire tenure of the policy. One can choose monthly/yearly payments, as feasible. Limited payment: Insurers offer you a set of policy tenure frequencies (5 years, 10 years, 12 years, 15 years, etc.) within which you will be paying off the entire premium. With this mode of payment, while the premium seems relatively higher, the cumulative amount is much more affordable (as compared to regular payments) |
In some cases, insurers extend the assurance of a fixed amount to be offered as a maturity benefit in the case you survive the plan. Such guaranteed returns are a mode of financial security for you and your family. Whether you survive the tenure of the policy or you don’t, you and your beneficiaries receive a return, either in the form of death benefits or maturity perks. |
Critical Illness Rider: Your term insurance policy lists out a few ailments under this rider. If diagnosed with any of these ailments, the provider will offer you a sum assured that is either above the base amount or a part of it. You can use this sum to meet any financial requirements. Waiver of Premium: In the case, you have been diagnosed with a critical or terminal illness, or have been left permanently and completely incapacitated due to an accident, this rider ensures that you don’t need to pay the premium towards your term plan to keep it active. Increasing/Decreasing Cover: Say some unprecedented expenses emerge in your life in the form of an unplanned child, or there is a shot at mitigating expenses considering your dependents are becoming financially independent faster than you assumed - so there might be a need to introduce some adjustments to your coverage amount. However, term insurance plans are not usually flexible, and you would need a rider like this to introduce any changes to the cover amount. Terminal Illness Benefit: If diagnosed with a terminal ailment whose prognosis gives you a couple of months at the most, a terminal illness rider would extend you a unique perk - the insurer will offer you your sum assured, to be used as per your requirement. Accidental Death Benefit: While vanilla term plans offer your beneficiaries a death benefit that is equal to your sum assured, with this rider, in case the death is caused by an accident, the beneficiaries are offered an additional cover amount. Lifestage Benefits: In the event of a major life stage development (higher education, marriage, childbirth, etc.), the insurer boosts your cover amount by a pre-decided amount. |
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And say your older brother also purchases a term plan for ₹1 crore coverage, but he is 35 years old. Take a look at how the premiums differ (considering both are non-smokers, salaried and have the coverage till they are 65 years old) CASE 1: You. Your premium is ₹10.5k - ₹12k (for a tenure of 40 years) CASE 2: Your brother. His premium is ₹16.5k - ₹19k (for a tenure of only 30 years) Now, understand this: the premium on your term plan is locked in according to your age at purchase, and you pay the same amount throughout the entire tenure of your policy. So, the earlier you purchase the plan, the less you pay! |
Under Section 80C of the Income Tax Act, 1961, you can claim deductions up to ₹1.5 lakh for premiums paid towards your Endowment plan. Under Section 10(10D) of the Income Tax Act, you can claim tax exemption benefits on the death and maturity benefits received from Endowment policies. |
For the payout modes, term insurers offer you two options - Staggered- This is a monthly disbursal of the sum assured. Lumspsum- This is the accumulated disbursal of the coverage amount. Based on your family’s financial requirements, planning, and goals, you can opt for the mode that suits them the best. |
Some endowment plans offer the option to take a loan against the policy's cash value. This comes in handy if you need some immediate financial help and don’t need to surrender the plan. |
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What are the Cons of Term Insurance Policies vs Cons of Endowment Plans?
| Cons of Term Insurance Policies | Cons of Endowment Plans |
|---|---|
Age, Health/Medical history, Educational qualifications, Profession, Hobbies and lifestyle, Financial stand (income) While some of these help them determine the payout risk, others act as catalysts in calculating the cover amount. |
Since endowment policies offer a savings component, the premiums are typically higher than those of term insurance plans. This may not be an ideal financial move since the savings component of Endowment plans is not a value-worthy addition. |
So, when purchasing the plan, make sure that you have had professional help in calculating the cover amount (you can opt for a free term insurance cover calculator), choosing the tenure and deciding on riders. |
While endowment plans shield policyholders from market-linked investment channels that fetch higher risks due to fluctuations, they also prevent you from getting better returns. The corpus received as maturity benefits is significantly less than what you could have earned with other investment tools. Thus, the spiked premium you pay to cover this perk is not worth it. |
Usually, both the maturity and death benefits received via Endowment plans are tax-free. However, in case you Withdraw funds from the policy before the tenure ends Avail of loans against the policy Surrender the policy before the completion of its tenure there will be tax implications in the form of reduced tax benefits or triggered tax deductions. |
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The maturity benefits of endowment plans don’t grow at pace with the current inflation rate. Hence, the purchasing power of the maturity benefit may get significantly mitigated over the years, owing to the leaping inflation rates across all industries. |
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Endowment policies have limited liquidity potential compared to other investment tools and channels. Withdrawal of funds from the plan (before maturity) or surrendering the plan may result in financial implications or mitigated payouts. |
Term Insurance vs Endowment Plans: Which is a Better Choice?
| ASPECTS | Term Insurance | Endowment Plan |
|---|---|---|
| DEFINITION/GOAL | A vanilla protection tool that extends financial help in the form of the sum assured and additional amounts (from riders) after the policyholder's death. | A protection tool and savings channel combined into one, which offers Death benefits to the beneficiaries in the event of the policyholder’s death and Maturity benefits to the policyholder in case he survives the tenure of the policy |
| Coverage size | Extensive coverage | Standard coverage (since a portion of the premium goes into the savings component) |
| Premium Paid | Affordable | Spiked (as compared to term plans) |
| Maturity benefit | None | Yes |
| Riders | Yes. The most common ones include - Critical Illness, Accident Death benefit, Terminal Illness, Waiver of premium, Increasing/Decreasing cover, and Life Stage benefits. | None |
| Tax benefits | Yes - Under Section 80C, 80D, 10(10D) | Yes - Under Section 80C and 10(10D) |
Though Endowment plans have become quite popular owing to their saving component, the premium hikes are not worth the measly returns you get from this policy. Term insurance plans, on the other hand, though a pure financial protection tool, are not just affordable, but considering their significant sum assured, they are the perfect financial replacement for your family when you are not around.
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Conclusion
Term insurance and Endowment plans have different goals. While one offers to financially replace you in the event of your death, the other adds on a savings component. However, in the case of the latter (Endowment policies), since there is a savings aspect on top of the insurance channel, you have to compromise on the coverage amount or pay significantly high premiums.
